I recently had a discussion with a group about how they were doing during these challenging economic times. Many were making ends meet, but if things were to get worst, most would have to make some difficult decisions. One young woman who graduated with her master’s degree 2 years ago shared that the pause on her student loan debt has helped her to pay down her credit card liabilities. However, she is wondering about what to do with her 100,000 plus student loan liabilities. She smiled and said I’m hoping that the president forgives student loan debt. Although it sounds nice, the truth is, if the president forgives student loan debt, inflation would continue to persist longer than we imagined.
Most of us young professionals have bad debt and don’t have a plan or way to pay down the debt that we owe. Now don’t get me wrong, I do believe education is important. However, we need to be aware of bad debts and the risk involved. We need to consider what options we have if we were to take on the risk of liabilities and we need to create a plan to tackle it. Bad debt does not only include student loans, there are others out there as well. According to businessinsider.com “Millennials have now racked up over $1 trillion of debt, according to the New York Federal Reserve. This is a 22% increase in just five years, which is more than any other generation in history.”
This is a very alarming statistic and should not be one that we take lightly. Debt is something that, if we don’t take seriously, can have server implications on not just us, but our families and the generations to come after them.
What’s the difference?
Before we begin, we need to discuss what the difference is between good debt vs Bad debt. Good debt are liabilities that can increase your net worth and appreciate overtime. Bad debt are liabilities that takes away from your net worth and depreciates overtime. One common question is when is the right time to take on negative liabilities?
The answer to that question can vary based on our financial situation. Ultimately it comes down to a few things. 1. Can the liabilities help propel us forward financially? What is the current market telling us? Is it the right time to take on the risk? What other options are out there for us? If we are wrong about the risk, is there a plan to pay down the debt that was taken out? These questions can be challenging to answer alone sometimes, so remember to speak with a financial advisor for guidance.
10 Examples of bad debt
- Student loans
- Credit card
- Medical
- Personal loan
- Auto loan
- Mortgage
- Payday loans
- High-interest
- consolidation loans
- Tax
Student loans
This can be controversial so let me explain what makes student loan debt bad debt. Student loans become bad liabilities when we don’t have a plan to pay off the debt. Even if we are making a payment so that it “counts” towards repayment, a question we should ask is are we making enough to pay for the principal or just the interest? Interest rates on student loans are typically high, which can make it difficult to pay off the loan in a timely manner. Before taking on student loan liabilities, please create a plan and read the fine print. Taking on student loans without a plan can cause significant strain on our finances and make it difficult to make ends meet. If we default on our student loan payments, our credit score will be negatively affected, making it difficult to borrow money for other purposes in the future.
Credit card debt
This is one of the most common types of bad debt. It can be very expensive, with high interest rates and late fees. If you carry a balance on your credit card, it can negatively impact your credit score. Credit card liabilities can be difficult to manage with multiple credit card payments each month, which can lead to missed or late payments that can damage your credit score. In these current economic times credit card liabilities can increase with the rise of interest rates. This will cause minimum payments to increase which can make it difficult for us to stay current if the previous minimum payments were difficult for us to pay.
Medical debt
This type of liability can be very costly, especially if you must pay for unexpected medical expenses. Often, medical debt has high interest rates and can be difficult to pay off. Depending on the type of medical services received, medical debt can range from a few hundred dollars to tens of thousands of dollars or more. Additionally, many of us struggle to pay off these debts due to limited financial resources or unexpected expenses that prevent them from making timely payments. Medical debt is a major problem in the US, with nearly half of all Americans reporting that they have medical debt or are struggling to pay it off. This can have serious effects for our financial stability and wellbeing as young professionals.
Personal loan debt
This type of bad debt is often used to consolidate other debts or finance a large purchase. However, personal loans can have high interest rates, which can make them difficult to repay. Lenders can sometimes see personal loans as high risk and depending on our credit score, we could get tagged with a high interest rate. Personal loan liabilities can be difficult to manage and may lead to financial problems down the road without a plan. If we do not have a plan its best to avoid taking out a personal loan.
Auto loan debt
Auto loans are another common type of bad debt. They have high interest rates and require a large down payment depending on your credit score. If we’re not able to make our payments on time, we could end up losing our car and have delinquencies on our credit report. To avoid falling into bad auto loan liabilities, it is important to carefully consider our budget and make responsible borrowing decisions. If we are struggling with bad auto loan liabilities, there are options available to help us get back on track. Speak with a financial advisor or credit counselor to develop a plan to get out of debt and improve your financial situation.
Mortgage debt
taking on mortgage liability is often necessary to purchase a home, but it can be difficult to pay back. Interest rates on mortgages can be quite high if you don’t have the required scores for first time home buyer programs. Also, if you have a variable interest rate loan, it can fluctuate over time. Mortgage debt can be considered bad debt for several reasons. Many people acquire mortgage liabilities to purchase expensive homes or other large assets, which often results in significant financial strain if the liability is not paid off quickly or there is no plan or strategy in place. Mortgage liabilities can often be difficult to discharge in bankruptcy. Please make sure that if you are interested in investment properties or even purchasing a home that you speak with someone and learn about your risk.
Payday loans
While payday loans seem like an effortless way to get cash in a pinch, they typically have very high interest rates and fees. They also require that you repay the full amount of the loan within a short period of time, which can be difficult for many people. These high-interest loans are typically designed to be paid back quickly, which means that many borrowers end up accumulating even more liabilities in the process. Additionally, payday lenders can often prey on vulnerable individuals who may already have difficulty managing their finances, leading to worse debt for those borrowers. If you are considering taking out a payday loan, it is important to carefully consider the potential long-term consequences of doing so. That way you can make an informed decision about whether this type of liability is right for you.
High-interest debt
This type of bad debt refers to any form of borrowing that has a high interest rate. For example, some credit card companies charge up to 20% interest or more on their balances. This can make it very difficult to pay off the liabilities in a timely manner. High-interest debt can trap us in a cycle, making it difficult or impossible to pay off what you owe. High-interest liabilities can damage our credit score and make it difficult to access other types of credit in the future. If we’re struggling with high-interest liabilities, it’s important to seek out professional assistance from a financial planner or credit counselor who can help us manage our finances and develop a plan for paying off what is owed.
Debt consolidation loans
These loans can be used to consolidate multiple debts into one single loan. However, they typically have high interest rates and fees, which can make them difficult to repay. Debt consolidation loans can sometimes come with high interest rates that can quickly accumulate and leave us buried in even more debt. Additionally, these loans typically only solve the problem of debt repayment in the short term, leading to even bigger problems down the road for the long term. Sometimes many people who take out these loans may not have the financial discipline to stick with a repayment plan, which can lead to even more debt and financial problems in the future. Please remember to reach out to a financial planner or credit counselor if you aren’t sure if a debt consolidation loan is right for you.
Tax debt
This type of bad debt can be especially costly, as it may include interest and penalties. If you’re unable to pay your taxes, you may end up owing the IRS a significant amount of money. Tax liabilities can negatively impact your credit score and make it more difficult to secure financing in the future. Additionally, tax liabilities often comes with hefty interest and penalties that can add up quickly. And finally, if you are unable to pay off your tax liabilities, it may result in aggressive collection actions from the IRS, including wage garnishment and seizure of assets. If you’re struggling with tax liabilities, it’s important to understand your options and seek professional help to ensure that you can resolve your debt in the best way possible. Remember small business owners, Sales and Use Tax is collected for your state and not collected for business spending or vacations 😊.
Conclusion
That is 10 examples of bad debt, but there are many more. It is important for young professionals to be able to differentiate between good and bad debt, because the wrong type of debt can have a serious negative impact on our finances. We hope this article has helped you understand that bad debt can cause major setbacks if we don’t have a plan in place to pay the debt back. What makes these types of debt so dangerous is that they can quickly snowball out of control if we’re not careful.
The key to avoiding bad debt is to be aware of it and have a plan to pay it back. If you need help creating a budget or getting your finances in order, we recommend talking to a financial advisor. They can help us create a plan for getting rid of our bad debt and improving our overall financial health. Have you ever been in over your head with bad debt? What are some strategies you used to pay down your money owning liabilities? Let us know in the comments below! Check out my other blog post 6 Debt Traps to Avoid.
Pingback: Simple Tips for Young Professionals to Pay Down Credit Card Debt Faster